...
However, when I tried to drag-and-drop of the directory folder containing the .obj and .mtl files into the main pane of that window, nothing happens but I get this error message in the cli (I'm using cygwin bash) command window:

You can't drag a folder in the Furniture Library Editor. You can select multiple OBJ files and/or ZIP files containing OBJ/MTL files and drag&drop those in the FLE window.

[s]I use the Java runtime provided with Sweet Home 3D and that one works perfectly fine.[/s]
Correction, for the FLE is use an older runtime: 1.7.0_261.